Strategy
We seek to achieve an attractive total return while preserving principal and avoiding defaults. The strategy benefits from our emphasis on fundamental, bottom-up credit analysis, and the deep experience and expertise of AdCap’s senior loan team. We aim to consistently outperform traditional debt alternatives through disciplined underwriting and thoughtful portfolio construction.
Middle Market Overview
Meet the Middle Market: A Stronger Investment Choice
The middle market is broadly categorized into three segments, delineated by borrower EBITDA size…
The upper middle market consists of borrowers with EBITDA above $50 million,
the core middle market ranges from $25 million to $50 million of EBITDA, and
the lower middle market is comprised of borrowers with $25 million of EBITDA or less.
Source: National Center for the Middle Market, Year-End 2022 Middle Market Indicator
Who Makes Up the Middle Market?
- There are nearly 200,000 companies that make up this group
- These companies are owned by families, entrepreneurs, private equity sponsors, and occasionally, public shareholders
- They generate approximately one-third of the private sector GDP and employ roughly 48+ million people
- Middle-market firms contribute nearly $10.0 trillion to the national economy annually
Lower Middle Market Loans
Historically, the lower part of the middle market has offered significant advantages versus the middle market’s upper tier. AdCap focuses on lower-middle-market (LMM) companies for good reason. LMM loans offer several key advantages:
Lower Leverage
LMM borrowers typically carry less debt (around 4x EBITDA) compared to upper-middle-market (UMM) companies (6-7x EBITDA). This translates to lower risk.
Higher Recovery Rates
In the event of default, LMM loans boast significantly higher recovery rates (approximately 85%) than UMM loans (75%).
Attractive Returns
Historically strong performance throughout various economic cycles and largely uncorrelated with traditional asset classes.
Enhanced Lender Protection
LMM loans typically include stricter financial covenants, giving lenders greater control and protection compared to the often covenant-lite UMM market.
Direct Lending Features by Market Segment
| Lower Middle Market | Upper Middle Market | Broadly Syndicated Loans (BSL and Leveraged Loans) | |
|---|---|---|---|
| Average LTM Leverage | 4.0x | 5.5x | 6.5x |
| Average LTM Yield | 11.8% | 11.9% | 9.3% |
| Average Yield Premium | 186 bp average premium BSL over the last 10 years | 165 bp average premium to BSL over the last l0 years | Average term loan yield of 6.3% over last l0 years |
| Credit agreements | Inclusion of 1 or more financial covenants-comprehensive agreements | Covenant lite or covenant loose; similar credit agreements as BSI | Mostly covenant lite |
| Default & loss | Better historical default and loss stats relative to UMM | Better historical default and loss stats relative to BSL | Less Favorable against LMM and UMM; More favorable against HY |
| Source | Direct origination, sponsored | Direct origination, sponsored | Bank arranged/lead/syndicated |
| Due diligence | 8-12 weeks in-depth underwriting | 3-6 weeks | 1-2 weeks |
| Number of lenders | Sole or up to 4; smaller groups enable efficient collaboration or positive outcomes | Sole or up to 12 | 12+ |
| Seniority | Senior- 1st claim on assets + pledge of stock | Senior- 1st claim on assets + pledged stock | Senior- 1st claim on assets |
| Borrower EBITDA | $7.5mil. – $30.0mil. | $30.0mil. -$100.0mil. | |
| Loan facilities | $25.0mil. – $150.0mil. | $100.0mil. – $500.0mil. | >$300.0mil. |
| Liquidity | Private Not Traded Limited Price Volatility | Private Not traded limited price volatility | Trade In secondary markets; priceolatility |
Why Private Credit
Institutional investors continue to pour assets into the private credit space, drawn to its uncorrelated returns and higher yields versus public fixed income.
Private credit remains an appealing alternative on a relative value basis, considering the prospect of higher interest rates and market volatility.
At a basic level, private credit is a debt-like return that’s created in a non-public, non-traded world. A more specific definition of private credit will likely depend on who you ask, as the landscape has evolved and expanded significantly, though the primary driver of institutional investor interest in private credit, is risk-adjusted return.
Portfolio Benefits:
- Diversification
- Attractive risk return profile
- Income yield, and reduced overall volatility
- Inflation hedge
- Low correlation to public markets
- Lower risk than private equity, since debt sits higher than equity in the capital structure
- Good alternative to fixed income investment
Direct lending — also termed private debt — is the largest subset of private credit, and returns in the space have historically been considered attractive and stable, especially from a fixed income standpoint.
Direct Lending
Key Driver of Overall Private Credit GrowthThe Fund’s strategy is focused on direct lending—the predominant asset class in the private credit universe. Direct lending includes any debt held by or extended to privately held companies, and it most commonly involves non-bank institutions making loans to private companies.
Direct lending has historically offered attractive income compared to public market alternatives, with lower pricing volatility and risk of default.
Portfolio
Invested in their potential: explore our growing portfolio of companies.
From Healthcare to consumer products and more, we see opportunities across a variety of business sizes, stages, and sectors.
